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Introduction

McDonald’s,
the long-time leader in the fast-food wars, faced a crossroads in the
early 1990s. Domestically, sales and revenues were flattening as
competitors encroached on its domain. In addition to its traditional
rivals—Burger King, Wendy’s, and Taco Bell—the firm encountered new
challenges. Sonic and Rally’s competed using a back-to-basics approach
of quickly serving up burgers, just burgers, for time-pressed
consumers. On the higher end, Olive Garden and Chili’s had become
potent competitors in the quick service field, taking dollars away from
McDonald’s, which was firmly entrenched in the fast-food arena and
hadn’t done anything with its dinner menus to accommodate families
looking for a more upscale dining experience.

While these
competitive wars were being fought, McDonald’s was gathering flak from
environmentalists who decried all the litter and solid waste its
restaurants generated each day. To counter some of the criticism,
McDonald’s partnered with the Environmental Defense Fund (EDF) to
explore new ways to make its operations more friendly to the
environment.

McDonald’s
roots go back to the early 1940s when two brothers opened a burger
restaurant that relied on standardized preparation to maintain
quality—the Speedee Service System.

So
impressed was Ray Kroc with the brothers’ approach that he became their
national franchise agent, relying on the company’s proven operating
system to maintain quality and consistency.

Over the
next few decades, McDonald’s used controlled experimentation to
maintain the McDonald’s experience, all the while expanding the menu to
appeal to a broader range of consumers. For example, in June 1976,
McDonald’s introduced a breakfast menu as a way to more fully utilize
the physical plant. In 1980, the company rolled out Chicken McNuggets.

Despite
these innovations, McDonald’s tremendous growth could only continue for
so long. Its average annual return on equity was 25.2% between 1965 and
1991. But the company found its sales per unit slowing between 1990 and
1991. In addition, McDonald’s share of the quick service market fell
from 18.7% in 1985 to 16.6% in 1991. Plus growth in the quick service
market was projected to only keep pace with inflation in the 1990s.

McDonald’s
faced heightening competition on several fronts. First, its traditional
rivals—Burger King, Wendy’s, and Taco Bell—were eating into its margins
through promotions and value pricing strategies. Taking a leaf from
McDonald’s own playbook, Sonic and Rally’s were using a very limited
menu approach to attract time-strapped consumers. Finally, Chili’s and
Olive Garden were appealing to diners looking for something a little
more enticing that the familiar Golden Arches for their families.

In the late
1980s, McDonald’s began recognizing the importance of maintaining an
ecologically correct posture with the public, which was becoming more
concerned about the environment. For example, in 1989, 53% of
respondents in one survey revealed that they had not bought a product
because they didn’t know what effect the packaging would have on the
environment. Closer to home, a 1990 study showed that each McDonald’s
generated 238 pounds of on-premise solid waste per day.

It’s no
surprise, then, that McDonald’s sought a way to reduce its solid waste
while providing a more environmentally acceptable face to the public.
Beginning in 1989, it partnered with the Environmental Defense Fund, a
leading organization devoted to protecting the environment, to seek
ways to ease the company’s environmental burden on the landscape.

Together,
EDF and McDonald’s considered its impact on a wide range of
stakeholders—customers, suppliers, franchisees, and the environment.
The company gave its franchisees much autonomy in finding ways to
eliminate environmental blight. The company’s hope was that from these
divergent approaches, it stood a greater chance of finding solutions
with broad applicability than if it had tried to pursue a
one-size-fits-all approach from the outset.

Some of the
environmentally inspired solutions that came out of the collaboration
with EDF were the:

Introduction of brown paper bags with a considerable
percentage of recycled content.

Solicitation of suppliers to produce corrugated boxes
with more recycled content, which had the twin effect of reducing solid
waste and building a market for recycled products.

Abandonment of polystyrene clamshell containers to hold
sandwiches in favor of new paper-based wraps that combined tissue,
polyethylene, and paper to keep food warm and prevent leakage.

McDonald’s Sustained Prosperity

The secret
of McDonald’s success is its willingness to innovate, even while
striving to achieve consistency in the operation of its many outlets.
For example, its breakfast menu, salads, Chicken McNuggets, and the
McLean Deluxe sandwich were all examples of how the company tried to
appeal to a wider range of consumers.

The company
has also made convenience its watchword, not only through how fast it
serves customers, but also in the location of its outlets. Freestanding
restaurants are positioned so that you are never more than a few
minutes away by foot in the city or by car in the suburbs. Plus
McDonald’s is tucking restaurants into schools, stores, and more.

Key Threats

The key
threats to McDonald’s domestically are the lack of growth
opportunities. The market is well saturated, and it would difficult to
achieve double-digit growth. Other concerns are a newfound emphasis on
healthier eating. Most of McDonald’s most popular fare probably in some
small way contributes to the increasing incidence of cancer, heart
disease, and diabetes among the population.

But I feel
the key threat to McDonald’s continued success is its very ubiquity.
Because McDonald’s are everywhere, the dining experience is never
special. And as Baby Boomers age and become more affluent, it is likely
that they will leave behind their fast-food ways, if only to step up to
moderately priced restaurants like Olive Garden, Bennigans, and
Pizzeria Uno. These chains have the added advantage of serving
higher-margin alcoholic drinks. McDonald’s, meanwhile, has to
continually battle Burger King and Wendy’s, which leads to an erosion
of margins for everyone. Even alliances with toy manufacturers, while
popular with consumers, do little for the bottom line because the cost
to run these promotions can be quite expensive.

Responding to Burger King’s October 1 Announcement

The October
1 announcement from Burger King that it would begin offering table
service is not much of a threat at all. You can try to dress up fast
food, but it’s still fast food. I couldn’t imagine this being a potent
draw for consumers. McDonald’s best course is to ignore this
development as irrelevant. As the market leader, McDonald’s does not
need to respond to every competitor’s initiative. Indeed, doing so
would have the effect of making McDonald’s look reactive and less like
a leader.

The
advantage of not responding to Burger King’s initiative is that the
company can preserve its resources for other marketing thrusts that may
provide a bigger payoff. The disadvantage of not responding to Burger
King’s initiative is that you allow the firm to establish itself in a
unique way in the minds of consumers—that of a fast-food restaurant
that provides sit-down service. But again, is this inherent
contradiction of fast-food fare and upscale dining experience likely to
resonate with consumers? I would say no. If Burger King’s initiative
does prove popular with consumers—as evidenced by expanding sales and
market share—McDonald’s would be forced into catch-up mode. But I think
that this is a risk that the company should be willing to take.

Promoting Flexibility Through Its Operating Strategy

The key
thing that McDonald’s operations strategy has to support is
experimentation. Now somewhat long in the tooth, McDonald’s needs a
breakthrough that will provide new avenues of growth. It has a long
history of such experimentation, which has resulted in some new profit
centers like Chicken McNuggets and the breakfast menu. Some later turn
out to be duds like the McLean Deluxe, but inevitably experimentation
in limited outlets offers McDonald’s a way to retain its key
strengths—quality and consistency—while continuing to evolve for new
palates and pocket books.

McDonald’s and the Environmental Defense Fund

In some
ways, partnering with the Environmental Defense Fund was a
masterstroke. It brought both respectability and valued expertise to
its environmental efforts. It also provided a primetime venue for EDF
to make a difference. Any successes, even if only incremental
improvements, would have major ramifications because of the sheer size
of McDonald’s operations.

McDonald’s
should continue its partnership with EDF. With ecology a growing
concern among consumers, it makes sense to be a good corporate citizen
and get all the public relations accolades that go along with such an
alliance. It also pays off in the bottom line by reducing shipping
costs for supplies as well as garbage removal fees.

McDonald’s
would do well to stay in the vanguard of corporations who have become
environmentally aware. If it tries to shirk its responsibilities, it
can foresee a public relations nightmare in the making. But if it does
manage to come up with some breakthroughs through its collaboration
with EDF, it can score a tremendous amount of goodwill with the public,
which may even provide a halo effect to mitigate any other PR troubles.

How far
should McDonald’s go on environmental issues? There is definitely
a public relations benefit in being seen as an environmental leader,
and the collaboration with EDF goes a long way in making that happen.
Still McDonald’s has had a lot of success in giving its franchises some
latitude in developing new solutions.

The line in
the sand in determining how far McDonald’s should go with its
environmental efforts is determined by the cost of the initiative
relative to the hard-dollar benefits and harder-to-quantify public
relations buzz it gets from being in the forefront on environmental
issues. The bottom line is that environmental efforts can’t detract the
company from its primary mission of providing consistent quality to
consumers. If environmental efforts start to be a drag on the company’s
future profits, it’s time to ease up. Ideally environmental initiatives
should pay for themselves by reducing other kinds of costs.

Dealing With the Product Range Explosion

McDonald’s
had done well with a fairly limited product range. But falling per unit
sales is a danger sign for the firm. With competitors gaining ground on
McDonald’s, it may indicate a need to refresh its product line. Perhaps
the best way to do that is by rotating in a couple highly promoted new
menu items. This would have the effect of enlivening the product menu,
without the need to go head to head with competitors on price.

This
slackening of per unit sales might also indicate that McDonald’s
critical success factors have changed. Perhaps in the new environment,
fast, convenient service is no longer enough to distinguish the firm.
At this time, a new critical success factor may be emerging: the need
to create a rich, satisfying experience for dinner consumers.

To maintain
consistency in new products as it expands the product line, McDonald’s
must rely on test marketing new menu items in pilot locations. This
approach will let the firm identify which items are likely to prove
popular with consumers while ensuring that the company can deliver new
products with consistent quality nationwide. McDonald’s already has a
history of doing this so it will not require major changes to its
operations strategy—at least initially. If the product line-up gets too
large, then the task of maintaining quality becomes exponentially
harder. The trick is to consider how to eliminate some of the existing
menu items when you introduce new ones, while making sure the staff is
fully trained in how to execute these products successfully.

Because
McDonald’s has pretty well saturated the U.S. market, it’s only real
opportunities for growth lie abroad, where the competition is not so
cutthroat or by introducing new restaurant concepts under brands other
than McDonald’s. After all, McDonald’s is known for fast food. It’s not
really a pleasant dining experience, just a cheap and convenient one. I
feel that McDonald’s has reached the point of diminishing returns with
the McDonald’s brand and now needs to roll out new types of
restaurants.

Indeed,
McDonald’s has the opportunity to apply its core
competencies—scrupulous adherence to quality standards and continual
promotion of experimentation—in new venues. Imagine, if you will,
McDonald’s opening a new casual dining restaurant under the name of
Splendor. It could then franchise that concept nationwide and get some
of the dollars from consumers who have grown past fast food. But its
fastidious approach to operations would ensure that consumers
everywhere would experience the same dining experience—a tremendous
advantage for consumers who don’t want to be surprised with a bad meal.

McDonald’s
could try a number of concepts simultaneous in different parts of the
country. Those that seemed promising could be rolled out further. The
duds could be left to die quickly. While this will be an expensive
undertaking, it holds the potential to unleash new areas of growth in a
maturing market.

McDonald’s
faces some difficult challenges. Key to its future success will be
maintaining its core strengths—an unwavering focus on quality and
consistency—while carefully experimenting with new options. These
innovative initiatives could include launching higher-end restaurants
under new brands that wouldn’t be saddled with McDonald’s fast-food
image. The company could also look into expanding more aggressively
abroad where the prospects for significant growth are greater.

The
company’s environment efforts, while important, should not overshadow
its marketing initiatives, which are what the company is all about.